End of Month Summary – November 2012

I found my way higher again in November, but what lies ahead could be costly. The cost could come from not being invested enough or not being hedged enough. The good news is that I did better than the indexes for another month. That pulls me ahead or at least even with the major indexes for the year-to-date and the past 12 months. Of course I’ll be paying more in taxes from the higher realized gains instead of a buy and hold strategy. I’m comfortable with that thanks to the reduced risk I’ve taken throughout this year. The older I get, the more downside risk affects my decision making over upside risk.

I ended November with a Net Liquidation Value of $112,467.72 (and a Net Asset Value of $112,359.03) accordingto Interactive Brokers after finishing October with a balance of $110,740.22. That gave me a gain of $1,727.50on paper (~+1.56%) for November and a realized gain for the month of $28.85. I receivedno dividends in November. Quicken reported that I have $112,358.73. The NAV is within a few cents of the Quicken balance. I didn’t take the time this month to double check which option reported differently in Quicken than IB. It’s close enough not to matter.

If all of my naked puts were assigned, my spreads all lost 100% and my covered calls expired worthless, I’d be only 81.63% invested in this account. That’s lower than I’ve been in years, but is a little misleading since my T and VNQ spreads could become long positions. I just have them hedged for now. If I take the assignments from the short puts on those, I’d be over 105% invested. My spread percentage dropped from 9.93% to 2.85% since I’m using some positions that are smaller and closer to the money (if not in the money). I started adding a little more exposure, but since I’m hedging, the effect is small. I plan to stick with the hedging strategy, at least through the end of December and maybe deeply into next year. If this continues to bring in decent low risk returns, I see no reason to change this new plan (for part of my account) until we get a reasonable correction that removes some of this jittery risk and opens the door to a better entry point. The majority of my account is not hedged and that might be the wrong decision, but I’m OK with some risk. I just want to keep it in check.

This is my asset allocation in my IB account as of the end of November.

Large-cap ETF: 12.64%

Mid-Cap ETFs: 16.2%

Small-Cap ETF: 12.64%

International: 0.0%

Oil: 14.98%

Individual Stocks & Other Sector ETFs: 18.05%

Bonds: 1.78%

Short ETFs: 0.0%

Various Option Spreads: 2.85% (these numbers also included in the above percentages)

These are my returns according to Quicken through 11/30/12:

YTD return: +13.51%

1 year return: +16.02%

Annualized returns since November 18, 2009 (when I opened my IB account): +2.77%

According to Morningstar, here’s how I compare to the major indexes (including dividends) through the month’s last day of trading, November 30, 2012:

Dow Jones Return: YTD change +9.38%, 1 year change +11.10%

S&P 500 Return: YTD change +15.36%, 1 year change +16.13%

NASDAQ Composite Return: YTD change +15.55%, 1 year change +14.88%

Russell 2000: YTD change +12.35%, 1 year change +13.09%

S&P Midcap 400: YTD change +15.36%, 1 year change +14.93%

The VIX ended the month at 15.87 and the VXN ended at 16.96. Both of these are down a few points from last month’s close. One of the theories after the election a month ago was that many traders had bought options to hedge risk and after the election, they started selling it to profit from the dip. This diminished the demand side and kept volatility from spiking. Now that it’s a month later, that theory should’ve played itself out, but volatility is still low. That means there’s something else at play. It’s possible traders aren’t fearful of a major sell-off. The consensus seems to be that a deal will be reached on the fiscal cliff, eventually. Although we could see some short-term losses, the bounce should be strong. It’s at these times that complacency tends to be many investors’ undoing. That’s why I’m buying insurance (going long puts) while the prices are cheaper. It’s a small price to pay to protect from big losses, but not investing enough right now is a big risk of missing the upside.